Using Texture Nodes for the Displace Modifier
It'd be nice if this worked, however as an alternative you might consider using cycles displacement.

Here's a simple example of what's possible. This scene is made up of one plane, with no displace modifier:





Note that it's an experimental feature, so you'll have to enable experimental features first, and you may encounter bugs. If you do find a bug, report it and chances are it will be fixed :)